Current Affairs Czechs escape direct costs of Greek contagion package but face stepped up scrutiny of public finances

Going into what turned out to be a marathon 11-hour long meeting of European Union financial ministers called to stop the contagion of the Greek financial crisis there had been speculation that all European countries, including the Czech Republic, would have been asked to contribute.

Photo: European Commission In the end, most of the massive 500 billion euro fund offered to help countries defend the euro zone will come from the countries within the single currency area. Only around 60 billion euros will be sought from EU reserves which all the 27 countries have contributed to. The total fund should be topped up by around half as much again from the International Monetary Fund.

It is hoped this large, but late, package will stop the Greek crisis spreading to Portugal, Spain, and perhaps also Italy and Ireland.

As the meeting ended, Czech Finance Minister Eduard Janota could make the following statement:

“This is a matter for the eurozone countries. In this sense there are no new obligations involving the Czech Republic.”

Eduard Janota In the strict sense, that was certainly true. But during times of economic crisis and uncertainly, everyone including governments, usually have to pay to give that extra bit of assurance to those lending money. Mr. Janota remarked that in the previous week the yields, or interest, on Czech bonds had risen by around 0.4 of a percentage point. If that sort of situation sticks then it will translate into an extra 4.0 billion to 5.0 billion crown bill this year for the state to cover the costs of its ongoing deficit.

For Mr. Janota the long and sometime fractious Brussels meeting had a elementary message for the politicians back home, mostly on the campaign trail ahead of lower house elections at the end of May.

“The basic message for the Czech Republic should be that we should not allow public finances to get into the situation where they have to be discussed by monetary funds or other countries. That is because the measures these countries are forced to accept have to be taken under pressure and to a certain extent are dictated. In this sense it should be very instructive for our politicians and I hope they will take this as an example.”

One conclusion from the finance ministers’ meeting was an urgent demand for more steps from Portugal and Spain to come up with new measures to get their public finances in better shape. For the chief economist of Prague-based Patria Finance, David Marek, that is also the message that the Czech Republic should take on board.

Photo: CTK “The current measures are necessary steps how to avoid the possible spread of speculative trades on financial markets. But the long term adjustment lies in fiscal adjustment.”

Analysts agree the current crisis will magnify markets’ attention on the outcome of the Czech elections and whether a new government comes in with a willingness to turn back the tide of rising public debt.